Ask The Ferguson Group

The Ask FG section is dedicated to providing answers to our readers. Below are questions regarding the agriculture industry and related finance along with expert answers from the FG Publishing editorial staff.

We purchased a Suredrop distributor at an auction. It looks like a seed planter or fertlizer spreader. Do you know when it was made?

Thank you very much for your inquiry. Unfortunately, the Ferguson Group is not a source of information concerning antique farm and ranch equipment. We specialize in providing financial and business counsel to commercial agricultural operations and lenders in addition to publishing our two newsletters.

Thank you!!!

Roy Ferguson II

President

My father, Frank Frazier, wrote articles in the past for the Ferguson Ag Report. We are sad to pass along the sad news that he passed away on October 20, 2011, at the age of 91. Would you be interested in any biographical materials for your publication?

Please let me know asap whether my reply by email was not received.

What are the names and telephone numbers of agricultural venture capital companies?

Unfortunately, venture capital companies that provide financing in the sense which you are probably interested very likely do not exist. Yes, there are several firms in NYC and elsewhere that indicate they are interested in venture capital financing involving agricultural projects. Conversely, past personal experience searching for such firms on behalf of clients have been completely unsuccessful. Each of the firms which were contacted were interested exclusively in discussing potential arrangements with huge corporations involving multi-million dollar projects exclusively. Even then, the individuals who were contacted were clearly not familiar with U.S. agricultural topics. All of the preceding is very unfortunate since U.S. production agriculture continues to be a deficit capital sector other than for conventional financing from banks, the Farm Credit System, and some suppliers.

Can a husband and wife who operate the family farm together be considered "sole proprietors". Sole means one, but can a married couple be considered sole proprietors? Title to the real estate is held by the couple as husband and wife.

Inquiry was made to...and confirmation received from...a consulting CPA regarding the answer to your question. A husband and wife who operate a family farm can operate it as a "proprietorship" and file their tax return via a Schedule F within a conventional 1040 tax return. Conversely, the term "sole" refers to just one person. The fact that your real estate is held via some form of joint tenancy reinforces the fact that two people are involved in the farming operation's ownership.

Mr. Bill Reeves of central Arkansas enquired: What about real estate that may have a depreciated book value but a gigantic fair market value? Does this distort the balance sheet. For example, buildings you purchased in 3 different time periods such as 1960, 1980, and 2000.

Rather than distorting Balance Sheets, pure reality appears. The real issue concerns the type of Balance Sheet that is being utilized. Balance Sheets @ Cost...commonly know as Balance Sheets @ Book Value...state the actual Net Cost of Assets which were purchased. Depreciation is subtracted subsequently as time passes. The inevitable result is that Depreciable Assets which are retained for a considerable length of time can eventually have "0" Book Value. But, that is reality...not a distortion since the remaining Cash actually invested is revealed. Moreover, the speed by which valuations decline generally reflects discretionary decisions by management/ownership.

Mr. Bill Reeves of central Arkansas asked, "What deficiencies do you see with the current accounting model? What is it missing? What does it do a poor job of doing?

First, all of the basic accounting methods currently being used have certain strengths and weaknesses. Used correctly, however, each provides invaluable information concerning the financial status of the entity being reviewed. Assuming proper utilization, Cash basis accounting, reveals an entity's [person/business/organization] exact financial condition regarding Cash actually received and expended for the precise period being reported. Its primary weakness relative to Operating Statements [Income Statements/P&L Statements] is that no recognition of Accounts Payable, Accounts Receivable, or Depreciation occurs because they have not become Cash transactions. The net result is that bottom-line Profitability can be grossly overstated or understated simply by delaying or accelerating the accounting period recognition of various items of Income or Expense...which is a common practice in agriculture to minimize or avoid entirely paying income taxes.

"I hate to admit it, but my budgeting and financial forecasting are poor-to-nonexistent. What are the first steps and what is the process to accurate budgeting and financial forecasting?" Steve Henry, central Iowa.

The first element is to adopt "zero-based" budgeting in your total process involving Operating Statements [Income/Expense], Cash Flow Statements, and Balance Sheets @ Book Value & Fair Market Value. Achieving 95-97% forecasting and control accuracy consistently will require a high level of attention to detail and reference notes involving each line item. Avoid developing numbers ending in 3 & 4 zeros, such as $13,000 or $130,000 since they are obvious tip-offs of pure guesswork rather than careful development.

"I don't own any land, so my assets are equipment. Can a Balance Sheet at Fair Market Value be achieved by getting an auction based appraisal value every year? Also, isn't this the most accurate value to use for determining true depreciation? Thanks." John McGraw, southeastern Arkansas.

Obtaining an appraisal from a certified agricultural appraiser every year would be the most accurate method for identifying Fair Market Value. The appraiser would very likely include recent sales of comparable land in the area as part of his/her own evaluation process. But auction-based prices are usually established under duress rather than "what a willing buyer would pay a willing seller when neither is being pressured," which is the commonly used practical definition for Fair Market Value.

"Although it's a non-agricultural business loss, can I deduct the two bets I made on this year's and last year's Oklahoma University bowl games? I suffered a pretty fair financial loss. Anxious for your reply or any good ideas!"...Steve Ruggiero, eastcentral Massachussetts.

Considerable doubt exists whether you can manage to persuade IRS to accept your gambling losses as being tax deductible. Perhaps the best idea is to refrain from betting on major sports events involving 19-21 year-old kids! While no money was lost personally from betting, the psychological salvation from a personal perspective regarding both bowl games was the fact that Oklahoma's coaches and media acknowledged that OU's punter performed with special distinction in each one.

"How can you Cash Flow a $100,000 combine from the Sales generated by a 600-acre farm that a producer owns? Buyers must either pay more for farmers' products or government programs must be increased considerably." Richard Timmons, central Texas.

First, the preceding scenario could definitely be done by farmers producing grain within highly favorable circumstances...including a "normal" Debt load. Unfortunately, prospects are dim that production and market economics will ever combine sufficiently during the foreseeable future, so the real issue concerns what makes sense financially.

"What are the key elements which separate 'productive' Debt from 'unproductive' Debt? Also, can they be corrected reasonably quickly in order to prevent financial disaster from occurring?" Margaret Brooks, northeastern Oklahoma.

A glaring weakness regarding a huge portion of the Total Debt accumulated during recent years by U.S. farmers and ranchers is simply that it has been largely "unproductive" by accomplishing only minimal positive results...and in many cases severely negative. A strong or weak Debt Structure is confirmed by Current Liabilities % Of After-tax Profit Index. Exceeding a 90% level clearly invites serious financial trouble.

Why? Because that means that a huge 90% of every After-tax Dollar is obligated by contract to repay Current Debt. Unfortunately, financially distressed producers typically maintain CL%ATP index values above 200%.

"What are the basic differences between 'elastic' and 'inelastic' pricing regarding agricultural products?" George Brooks of southeastern Illinois.

Strangely enough, many U.S. farmers and ranchers commonly apply the two terms in exact reverse of their real meanings. Most agricultural products are actually classified as "commodity products having inelastic demand"... just as with gold and other precious metals, diamonds, oil and natural gas, electricity, dimension lumber, money, etc. Within normal, unregulated market circumstances, increasing or decreasing the supply by 1% will cause an approximate price change of 2-4% the opposite direction.

"Why are there no specialized agricultural venture capital companies currently operating in the United States." Ted Tietjen from southwest Nebraska.

The sad truth is that only one venture capital firm in southwest Iowa is the only agriculturally oriented venture capital company in the U.S. that the Ferguson Group knows which is actually operating and seeking sound, profitable opportunities in agribusiness for equity investment. Whereas some 5-6 organizations can be found on the Internet which indicate they are interested in agribusiness investments, personal inquiries revealed their thrusts to be restricted primarily toward associations with either foreign governments or giant corporations. Unfortunately, the term "agriculture" contains no glamour or investor pizzazz. Potential interest by outside investors is also sabotaged by the constant harangue from so many of today's producers that no one can be Profitable in U.S. agriculture without major government subsidies.

So, why would any investor having a sound mind be interested in providing funds in a "losing" industry? Yet, official data reveal that Cash Profitability during the six-year period of 2000-2004 recorded huge levels of 22.4% to 25.7%Gross Profit On Cash Revenue nationally, as well as excellent 16.3% to 20.0% margins if all USDA subsidies are eliminated from consideration.

"The U.S. has suffered erosion of the dollar's purchasing power much more than technical inflation as a result of the nation's unprecedented Debt levels in the form of money substitutes and unrestrained credit. Both the U.S. monetary system and the world are currently awash in Debt more than any time in history. Homes that cost $25,000 in Boston during the 1960s are valued at $450-500,000 today, without any improvement in quality. I am very concerned regarding today's prevailing misunderstanding regarding key, undesirable aspects about inflation. What do you think?" Steve Ruggeiro from east central Massachusetts.

Both global and our national economics are obviously too dependent upon deficit spending which results in mountainous Debt. Many countries' currencies have, consequently, been devalued to the point of being almost worthless. Unfortunately, a number of relevant values in production agriculture confirm several of the basic tenets of galloping inflation's impact on farm/ranch economics and Profitability. New tractors and combines today cost 4-5 times their prices during the early 1960s. Excellent crop land also costs 5-7 times its normal value during the mid 1980s. Whatever yield improvements that have occurred within the last 20 years usually resulted from non-land oriented technological advances. Since grain prices remained rather static during the same two decades, inflated producer expectations have obviously been the dominant factor.